In what is considered to be the most important pre-budget report for more than a decade, Alistair Darling has pledged to invest £20bn in the UK economy, including a cut in VAT to 15% for 13 months and bringing £3bn of key infrastructure projects forward from 2010/11.
Darling said the pre-budget report is: "Made against a background of economic uncertainty not seen for generations."
In a rowdy House of Commons, Darling's speech was greeted with both jeers and cheers from the house.
Darling said his announcements came to a: "£20bn fiscal stimulus between now and April 2010."
Key to Darling's proposals is a plan to bring forward £3bn of public spending from 2010/11 to next year. Roads projects were mentioned specifically, as were housing and other construction schemes.
While this spending is pending, VAT would drop from 17.5% to 15% from December 1 for 13 months.
Darling said banks had accessed £100bn in emergency funding since the bail-out last month, and "Bank of England estimates suggest that banking losses could reach £3 trillion," he said.
"Because of the size of our financial sector, we are likely to be affected more directly than other countries." Darling said the UK economy would contract by between 0.75% and 1.25% in 2009, but would then begin to grow in 2010."
The top rate of tax will now increase to 45% for those earning more than £150,000, and National Insurance contributions will increase by 0.5%.
He said that borrowing would increase dramatically to 8% of GDP within two years, but that the economy would be back to balance by 2015/6.
To boost business, Darling said: "Currently, companies are only able to offset losses against profits made in the last year.
"So I am today extending this repayments scheme so losses of up to £50,000 can be offset against profits made for the last three years. An estimated 75,000 businesses will benefit from this change, by receiving tax repayments.
"And of these, 90 per cent will have their full current losses wiped out," he said.
SME's experiencing cashflow problems will be able to access a special £1bn facility to allow loans of £1,000 to £1M easily, said the Chancellor.
Darling said he would also reveal a series of measures to boost the housing market, such as increasing lending, protecting repayments for those unemployed, and reposessions should be a 'last resort', and those falling behind would be given three months' grace. Greater detail would be revealed in April's budget.
Shadow chancellor George Osborne said the budget was: "Reckless," and said the increase in National Insurance was a: "Guided missile that goes to the heart of any possible recovery."